Ask yourself, “Are my investments working to meet my financial goals and needs for each stage of life?” If you can’t easily say yes, then maybe it’s time to re-evaluate or create a written investment plan.

Why you need a written investment plan

One of the first steps to creating a personalized investment portfolio is setting return objectives and risk tolerances for each stage of life.

Let me give you an example. As a young college grad, you may be fairly risk adverse and willing to target higher returns and therefore higher risk. However, as you enter retirement, your return objectives are much lower and therefore your risk is much lower.

This principle is straightforward, but many investors don’t take the time to define their financial goals, return objectives, and risk tolerances for each life stage. The danger in not setting these objectives early is that (1) you can’t know if your investments are working to achieve your goals if you have never clearly defined what your goals are and (2) you may design a portfolio that exposes you to the wrong level of risk (could be either too little or too much risk).

So how many stages of life should you plan for? 

You need to identify stages that entail unique financial requirements and goals. The average investor will have two life stages: earnings and retirement (though you many have others like semi-retirement). For each stage, you need to determine:

• The time period it will span
• Your age at the beginning
• What your life goals are
• Your financial needs to meet your goals
• And the financial instruments that are most likely to help you reach those goals

Setting portfolio objectives and structure

What’s your return objectives and portfolio structure for each life stage? This may seem like a straight forward question but truly poses many complexities.

First, identify the inflation adjusted amount of money that you need to have at the end of each life stage. For example, at the end of the earnings stage, I know that I’d like to have enough money in the bank to create an annual income of $50,000 in today’s dollars to live on each year.

The specific amount you use is up to you to determine.

There are many great calculators online to help you to figure out how much money you will need online.

• Start Farm retirement calculator
• CNN Money retirement needs calculator
• Another CNN Money retirement calculator
• Kiplinger retirement calculator

Second, for each identified life stage you need to determine the necessary rate of return on the amount of money you will be investing to reach your goals.

This si when a good handheld financial calculator comes in handy. Basically, you enter the amount of money you need at the beginning of a specific life stage (such as retirement), how many years between now and then, and your annual contributions.

The calculator will then spit out the rate of return that you need.

Remember that your rate of return is an average rate of return. For example, let’s say you need 8% each year. You can earn 0% one year and 16% the next year and that’s still 8% over the two years.

So don’t freak out if one year underperforms.

What’s your risk tolerance and benchmark indices?

Knowing how much you need to retire and the rate you need to earn will help you determine just how risk adverse or risk tolerant you need to be.

Just to be clear, risk does not mean anything negative. Risk is just the measure of a specific outcome, both good and bad.

If you need a high rate of return to achieve your financial objectives, then you have two options. First, increase the amount you are saving, which you should do anyways. And second, take on investments with higher risk.

Emotionally, many people can’t take on much risk. That means you are stuck with option #1 – invest more money. But if you can stomach it, then you should carefully evaluate higher risk investments.

Caveat – Don’t do anything stupid just because it’s promising big money.

As time passes, you will want/need to evaluate how your portfolio of investments is progressing. For that reason, select benchmark indices as a basis for comparison.

Example: If I’m investing in a bunch of large cap mutual funds, then I should compare my return to the S&P 500. But if I’m investing in small cap funds, then I should look at the S&P SmallCap 600.

This is just the start

A lot of work and research goes into creating a sound portfolio. But hopefully, this post gives you an idea of where you need to start.

If you have any questions, definitely consult a certified professional.

For everything else, follow Rabbit Funds on Twitter.

(This post was featured in the Carnival of Personal Finance hosted at Money Q&A)

Over the weekend, I came across the October 2010 copy of Money magazine that apparently I had stashed away. The lead article in this issue is titled 7 Secrets to a Richer Retirement. After reading through the article, I thought it would be worth reviewing and sharing some of the valuable points.

#1 “Get a good picture of the future you”

According to research, our brains are not programmed to identify with our future selves. For that reason, we have a hard time trading rewards today for rewards in the future. That single character trait is often the biggest hurdle to preparing for retirement. Socking money away means that today’s you can’t have something. But if the future you is a stranger, then it is difficult to trade something you want so that a stranger can have something years from now.

So what you need to  do is get to know your future self. Here are two ideas from Money’s article:

1. Write down what your life will be like when you retire. Where will you live? How many kids and grandkids will you have? How will you spend your time? What car will you drive? How big is your house? Is it paid off?
2. Consider one of your grandparents of the same sex. Use him or her as a proxy for yourself. See what his or her life is like and what you potentially are facing as you age.

My Review: Self-visualization can be a powerful motivator, but don’t stop here

#2 “Try to beat the other guy”

We are all at least a little competitive. Money recommends putting that to good use and apparently some research says it helps. Basically, if we find that we are lagging behind our peers when stacked up side by side, then some primal need kicks in and we make positive change.

ING actually launched a site where you can see how you compare. Statistics show that more than 20% of the people who spend time on the site make improvements. So maybe you should check out INGCompareMe.com.

My Review: Can be helpful in helping you to get motivated, but don’t spend too much time playing online staring at what everyone else is doing

#3 “Use reminders and checklists”

One of my favorite moments in the Disney movie Up is when the dogs are easily distracted by squirrels. We humans are prone to easy distractions as well, especially since preparing for retirement can be a 40 year process. So creating reminders and checklists can help you stay focused.

One great tip from the article is to create email alerts for yourself, though be specific. For example, send yourself an alert that says, “Put $2000 in Roth IRA by June 1,” or “Add $1000 to emergency fund by Sept 1.”

My Review: One of the easiest tips to implement and it can really pay off

#4 “Think bite-size pieces, not whole enchilada”

MetLife in 2008 released a Retirement Income IQ Test that indicated that most people overestimate how long their savings will last. In fact, “experts advice retirees to start withdrawing no more than 4% of their money each year to keep from running out – but 69% of people think they can take more. (quote from Money article)”

Apparently the problem is that we are all trained to think about our retirement fund as one large lump of money when we should actually think about our retirement needs in terms of what we will need each month. Tools like T. Rowe Price’s Retirement Income Calculator can help you estimate your monthly income in retirement. Compare that number to what you you want to have and you’ll have a better idea whether or not you are on track.

My Review: I absolutely agree that you need to consider your monthly income in retirement rather than just a single pile of cash in the bank

#5 “Make friends with an annuity”

If you’ve read any of my prior posts on life insurance companies, then you know that I have some strong feelings on the topic. Though I have to admit that an annuity can make a lot of sense for some people. Basically, by trading in some of your nest egg, you can create a stream of monthly income. The danger lies in the financial security of the insurer. So be careful choosing a company if you opt for an annuity.

My Review: Determine how you will disperse your nest egg to yourself and that may include some insurance options

#6 “Take losses in stride”

Research shows that as you age you become more loss averse. Meaning, you are less likely to take risks and feel the pain of a loss much more than the joy of a gain. The problem that this can cause is that you may invest too conservatively and not have enough money to last.

To help abate your concerns and maintain a healthy portfolio, you should stay financially educated. Don’t stop learning and watching. Also, don’t put too much into stocks after you retire and keep it that way. If you aren’t overexposed to stock market fluctuations, then you are less likely to freak out if the Dow Jones has a bad day, week, or month.

My Review: Just stay informed and don’t let small losses distract you

#7 “Protect the future you”

Personally, I’m looking forward to this problem. Research shows that as you age, your brain undergoes some subtle changes that make you more optimistic. In fact, you become less aware of danger. One reason why older people are more susceptible to scam artists.

So Money recommends the following to help keep your optimism in check:

• “Stay active” – Stimulating both your brain and body can help keep your thoughts clearer
• “Simplify your finances” – Have fewer things that you can mess up
• “Be hard to find” – Don’t talk to strangers who could be scam artists
• “Arrange now for help later” – Create a durable power of attorney so that a loved one can step in if need be

My Review: Nobody wants to face the reality that you can’t take care of yourself, so take care of yourself physically and mentally so you can

For the full article, check it out on CNN Money.

Disclosure: I recently wrote an article titled, 3 Reasons whole life insurance is not better than term life, in which I referenced an ongoing debate with a family friend. He has written a rebuttal argument for whole life insurance. While Rabbit Funds does not endorse the material presented in this article, I am happy to present it in order to be fair.

Buy term and invest the difference is a very popular piece of financial advice, but is it really a good idea? Here are a few things you should consider before practicing this strategy.

#1 It sounds good now, but how about later when it really matters?

Over half of all new permanent universal life policies are sold to people over age 65. Why? Well it depends on the situation, but there are some very compelling reasons to have life insurance in force for your entire life. One of the most frequent comments from older clients, even the very wealthy, is something to the effect of “I wish I’d done this when I was younger”.

#2 What do the pros say?

I’m not sure how “buy term and invest the difference” got so popular: I don’t know a single financial advisor that recommends this as a long term strategy to clients, and I work with a lot of them (the fee based kind that charge $15,000 for a financial plan, not the college kids that drop out after 3 months). And in discussing the issue with them, not a single one of them knew any advisors that advocated this idea either.You don’t often hear these advisors publically speaking out against it though, because they can’t. There are heavy restrictions on the ways advisors communicate financial advice. If an individual follows an advisors ideas and something goes wrong, that advisor can be sued and lose a license and/or job. As a result, very few advisors will publicly give out information, but instead will only deal with clients face to face. So if you are hearing financial ideas on the radio or web, it’s almost a guarantee that the ideas are someone’s opinion, someone who is not legally licensed to provide financial advice. In other words, not an expert. The person may have some great ideas, but they are not liable for anything they say. An advisor though, is on the hook and can be sued for every piece of advice he or she gives.

#3 It has nothing to do with commissions

In fact, most advisors would rather have the money go to investments, at least from a commission standpoint. In the long run investments pay significantly more in commissions than life insurance. And term insurance pays higher commission percentages.

#4 You don’t know when you’ll die

What if you can’t save enough money before your term policy expires? Once the initial term expires, prices can skyrocket and there is no guarantee you will qualify for a new policy. Even if you do, the price is likely to be around 7 times more expensive than the first policy. If you continue to pay your original policy, it will take about 5 years for the price to increase 10 fold. Another 10 years later and it will have increased by another factor of 10. Can you afford that?

#5 It’s a long term strategy in a short term time

The buy term and invest the difference strategy potentially forces you to live with the decision for the rest of your life, especially if you become uninsurable. Do you want to lock yourself into a financial strategy at an early age, not knowing what the future holds?

#6 Average vs. Actual

Many people focus way too much on the average return. If you have  $1,000 and get a 100% return in year 1, you have $2,000. If you have a 50% loss in year 2, you are back to your original $1,000, but you earned an average return of 25%. See the difference? Even though a fund may get an average return that looks good, the actual return will be worth roughly 60-70% of that.

#7 12% returns, are you kidding?

The notion that you easily get a 12% return out of the market, which is purported by many “buy term and invest the difference” guru’s like Dave Ramsey, is utterly false and should be criminal. From 1930-1979, the market averaged .22% each year. Yes, .22%. From 1980-1999 the average was about 12.7%. The last decade has been around 3%. Meaning the long term average is around 6%.

#8 Taxes

Roth 401k’s are relatively new and still rare. Most money is accumulated in taxable 401k’s. This means that if you have $1 million and are in a 25% tax bracket, Uncle Sam is entitled to $250,000 of that sooner or later. Right now, we are seeing some of the lowest taxes ever. But with the government spending money at the current rate, taxes aren’t likely to remain low. Factor in taxes of 33%, which is likely to be conservative, and all of a sudden, your actual return loses 1/3 of its value and is now down to 4%. That’s worse than many permanent life insurance policies.

A Real Life Example: I compared the actual cash value in a whole life policy for a top company to what would have happened had the same dollars been invested in the Dow Jones. The time period was 1981-2010. Keep in mind that this was the best 30 year period the market has seen. The results: cash value, a tax free $718,000 guaranteed not to lose value. The investment account: a taxable $1,050,000. Factor in taxes and those numbers aren’t too far off. Now I’m not saying you should invest all your money into a life insurance policy, but to ignore it as a resource would be a mistake.

#9 Emotions get in the way

The markets go up and down every day. Pulling out of the market because you’re afraid of losing money is too common. And it costs investors a lot in potential gains.

#10 The pitch is sexy, but…

Getting completely out of debt is a great goal, and self insuring sounds pretty appealing. But very few people have the financial discipline to do so. Not always because they are careless, but because life gets in the way of our plans. Is your life just like you pictured it 5 years ago? 10? How about 40 years from now?

#11 Money isn’t Math, and Math isn’t Money

Only 1 in 400 people retire with over $1,000,000. The worst part though is this: the average American salary is $45,000 per year. A typical employer 401k will put in 3% when you do 5%. A normal work-life span is around 45 years. This means that an average salary with a typical 401k plan and normal work-life expectancy will yield almost $1.4 million at 8% interest. Yet somehow only 1 in 400 can hit $1 million. Why? Real life gets in the way of the plans we make on paper.

#12 The death benefit itself

Unnecessary in the eyes of the self-insurance guru’s. But what if you are wealthy and have an estate tax due? Worst case scenario, a 401k could lose as much as 70-80% of its value in various taxes before the heirs get it, while a death benefit is less susceptible to this issue.

#13 Estate equalization

Few people have significant liquid wealth; it’s usually tied up in properties, homes, or businesses. What if you have a valuable asset to pass on to multiple heirs? What if one wants to keep and run the family business while the others want it sold to get their share? What if one wants to keep the family home but the rest demand it’s sold? This leads to fire sales and destroyed family relationships that could have been spared with some liquid cash from permanent life insurance.

#14 You want to spend your money

If you opted for buy term and invest the difference, you probably broke the number one rule of investing: diversification. You probably have all of your money in the market inside a 401k. If the market tanks, you are toast. For every $1 million you have saved, you can spend about $30,000 per year if you are living off the interest. Which you will have to do since it is the only bucket of money you have to pull from. Worse though, is that your money has to stay exposed to the market to keep up with the demands placed on it. This money has to provide an income, keep up with inflation, pay taxes, buy your next car, fund your vacations and on and on. All of a sudden this $1 million isn’t doing much for you because you don’t know how long the money has to last. Now you have a mediocre retirement income and are constantly worried about the market while you are retired.

#15 You want to enjoy your retirement

Here’s a retirement strategy that, fully explained and professionally executed, is worth several thousand dollars in fees. You want several different buckets of money to pull from in retirement – you want to be diversified. Having a Roth and a 401k is not diversification. If the market tanks you are out a lot of money. You want these buckets yes, but you want some locations to pull from that are not susceptible to the market losses. The only financial product I’m aware of that provides guaranteed growth every year, as well as guaranteed principle, is whole life insurance. At a 5-6%return or so, once paid up, the right kind of whole life policy can be a vital tool in your retirement plan. It is likely to out-perform even your investments in retirement.

Another Real Life Example: From 1973-1987, the S&P averaged almost 11.3%. If you had a $2 million nest egg and pulled $150,000 per year for 15 years starting in 1973, by the time 1987 rolls around you would be down to $900,000 because of average vs. actual returns.However, if you had a backup fund that was not tied to the market and, following down years, pulled money from your backup fund instead of your investments, you would have $3.35 million instead of $900,000. There are several retirement strategies that will allow an individual to spend a considerable amount more money in retirement and be less exposed to market risk. Permanent life insurance is a vital component of these strategies.

Conclusion

“Buy term and invest the difference” is a strategy that is widely known, but little understood. Those promoting it are typically good intentioned, but not dealing with individual financial situations. Instead they are promoting good, one size fits all philosophies, but not dealing with the intricacies of real life. In other words, the recommendations sound good on paper, but complex life situations get in the way sometimes.

On the other hand, a good, professional financial advisor deals with the what-if’s in life, creates a plan for them, and often understands complexities that would otherwise be overlooked. So before you make any financial decisions that could impact you for the rest of your life, do your homework, understand the issues, educate yourself, and talk to a few different professional advisors. In the end, the time you spend now could be worth millions later.

During my last year of college, my wife and I spent countless hours discussing how we intended to manage our finances. We spent a fair amount of time discussing our goals and what we needed to do in order to financially reach those goals. Fortunately or unfortunately, depending on how you look at it, we made some foolish investments at the same time.

Our eyes and desire to quickly reach our goals overrode all of those nagging feelings that were telling us, “This is stupid.” As a result, we created several boundaries to help guide future investment activities. Before I jump into the specific types of limits that you need, I want to briefly describe the importance of guidelines or boundaries.

Boundaries: The kite example

Think back to being a kid again and flying kites with your family and friends. If you were ever like me, then you occasionally wanted to let go of the kite’s string once it had reached the end. I believed that the tethered string was holding the kite back and not allowing it to soar higher into the sky. As you may know, if you let go of the string, then the kite may fly higher for a moment, but it inevitably always falls fast and crashes into the ground.

The string actually acted as an anchor and allowed the kite to stay its course and continue to fly. By removing the anchor, the kite is easily tossed about by the wind. Life is the same. We need boundaries in order to stay anchored and move in the right direction. Extrapolated to an investment scenario, creating written guidelines as part of an investment plan gives you an anchor which allows you to make smarter financial decisions and avoid being a reed that is tossed about in the winds of the market.

11 Essential guidelines for your investments

1. What are your liquidity needs? Different investment account types have different legal restrictions. For example, early withdrawal from a 401(k) or Roth IRA is not only a taxable event, but it carries a penalty with it. Take the time to understand when you intend to make major purchases, such as a care, additional education, or a home, and understand whether or not you will be able to access your invested money in order to meet your needs.
2. What is your investment time horizon? This guideline is closely tied to #1. Determine the date or year when you will need to access invested money. For long-term goals, instill now the mindset that those investments are long-term assets and unaccessible until that time. Writing this down helps deter the temptation to deviate from your plans.
3. What are your acceptable and unacceptable asset classes? Make a list of asset classes that you are comfortable investing in and a list of asset classes that you will not use. For example, my wife and I have as acceptable classes: bonds and cash, stocks and mutual funds, REITs, gold funds, and business holdings. Our unacceptable classes are: derivatives, collectibles, foreign currency, options, futures, or any other asset class where we have no discernible specific advantage. You may not agree with us, but have a rational reason for why you make something acceptable or unacceptable.
4. When are you willing to invest in individual assets? Individual assets are defined as stocks. As you begin investing, one bad stock can have a serious impact on your entire portfolio. So wait a while. My wife and I decided that until we have $500,000 in our portfolio, we will not invest in individual assets. And even then, we will still follow guidelines #5 and #6.
5. What percentage of your total assets can be placed in one investment? This guideline can make or break you. Even though an asset class is acceptable does not mean that you can go hog-wild. Restrict how much you will invest in any one investment as necessary. For example, our guideline states, “At no time will the Team invest more than 5% of its investable assets in any single company, stock, or individual investment except broad market mutual funds, index funds, or ETFs.”
6. What is the maximum percentage of your total assets that you will place in Company Stock? As you begin to add individual assets to your portfolio, don’t let Company Stock overwhelm your portfolio. We have all heard the horror stories about individuals who placed on their bets on the Company Stock. If your company gives you stock as part of your compensation, then great. But make sure you have a balanced portfolio.
7. What is the maximum percentage of your total assets that you will place in new investments? Carefully move into new investments. This guideline helps avoid “hot stock” tips and other tall tales heard on the back nine. Our investment plan states, “The Team will invest not more than 5% of the total portfolio amount in any new or individual asset or investment. Index funds, mutual funds and ETFs do not fall under this category unless they have portfolios with less than 50 assets.”
8. What is the maximum percentage of your total assets that you will place in unlisted investments? Unlisted investments are assets not listed on recognized stock exchanges and therefore bare additional risk. In order to limit that risk, I recommend allocating no more than 3% of your total portfolio to such investments.
9. Will you use leverage? Leverage comes in the form of short-selling or buying on margin. I’ve made and lost money using both techniques, but they add substantial risk if not properly managed. If you aren’t sure why, read 4 Reasons not to use debt to make an investment.
10. If applicable, how often will you discuss the performance of your portfolio as spouses? Keep your spouse informed about your portfolio. Or if you aren’t the one handling the finances, ask to be kept up-to-date. Even if you are inexperienced, two heads are still better than one.
11. How often will you rebalance your portfolio? Over time, certain assets will grow or fall faster than others. So you need to adjust your investment allocation to re-align it with your target allocation. So determine how often you need to that. Personally, I believe every two years is sufficient.

A sleep well investment portfolio

I like sleeping. I don’t get much of it these days. So having a portfolio that lets me sleep and doesn’t keep me up all night wondering whether or not my stocks are plummeting is important to my peace of mind and lifestyle.

Answering the above questions and then writing it down may take some time and seem mundane, but it is crucial to your success. Knowing where you are going (your goals) is not sufficient if you don’t know how you will safely arrive there (your boundaries).

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A few years ago, my wife and I had the opportunity to invest in a company that we hoped would go public. We were young, just married, and broke. So we took out a personal loan from a family member (for a fairly small amount) to make the investment.

Within months, the company went belly up. Since we weren’t able to recoup a single penny from our investment, we were left to work off the debt. This experience taught us several valuable lessons. Among those lessons was that one should be extremely cautious when using leverage to make an investment or increase the expected return on an investment.

Let me give you four reasons not to use debt to invest

First, you may not  have the right experience to manage the use of debt, such as borrowing from a margin account, when investing. Without the aid of an experienced advisor, avoid using financial instruments such as margin accounts.

Second, for the average Joe, slow and steady will win the race. We all have goals and dreams and it would be wonderful to achieve them today. However, our dreams can become nightmares if we try to run to them too quickly. Realize that if you follow tried and true investing techniques, you will arrive at your goals and have had peace of mind along the way.

Third, your mama was right – don’t spend money you don’t have. This is the foundation for any solid financial house. I read an article several months ago that referred to credit card arbitrage, which is borrowing money from a credit card with a very low promotional rate and then investing the borrowed money. The idea is that you’ll pay off the credit card before the interest charges hit and you’ll have made more money from investing the money than any fees associated with borrowing the money (e.g. cash advance charge).

The problem is that you are building a house of cards. What if you can’t liquidate the investment in time to pay off the credit card? Even though the nice marketing pitch says you pay no interest, it is actually accruing. So if you don’t pay off the credit card within the promotional period, then wham! You’ll be hit with all of the interest charges.

Fourth, we become too emotionally involved. For many people, investment decisions are based on emotions. We see the market begin to fall or rise and we sell or buy accordingly. So if we know that getting out of a bad investment now means we are left owing the debt, then we may choose to not sell hoping that the investment will come back. We may get lucky and the investment rebounds, or the investment will decrease in value even further leaving us with even more debt to repay.

So why would anyone use debt or leverage when investing?

Leverage acts as an accelerant. Just like adding gasoline to a fire, leverage can allow you to gain larger returns than you would otherwise be able to obtain.

Also, leverage increases the percentage return on an investment. Ever heard of OPM? Other People’s Money. Here’s a specific example.

• Scenario 1: I invest $100,000 and gain a return of $10,000. My percentage return is 10%.
• Scenario 2: I invest $10,000 of my own money and $90,000 of borrowed money (or OPM). If the return is still $10,000, then my percentage return is %100. This of course assumes no fees or interest associated with borrowing the $90,000, which is never the case.

Scenario 2 sounds nice because my return is %100 and I only had to tie up $10,000 of my own money. Though, at the end of the day, I’m $10,000 richer in either scenario. And I’m not financially committed to someone else in Scenario 1 if the investment begins to sour.

What are your experiences with using debt to invest? Good or bad. Also, sign-up for our RSS Feed for timely updates on other financial topics.

To celebrate the birth of our nation and the freedoms that we are afforded, I am writing three posts this week with a twist. Each post is based on an influential document which has given us rights.

So far this week, I have posted the Financial Declaration of Independence and Financial Bill of Rights. Today’s post, adapted from President Lincoln’s declaration which challenged slavery head-on, is the Financial Emancipation Proclamation. Without further ado:

Financial Emancipation Proclamation

On this second day of July, in the year of our Lord two thousand and ten, all persons held as slaves within any State of Debt or living without the benefit of a Budget shall now be in rebellion against Credit Cards, Living Paycheck to Paycheck, and Overspending, and shall be now and henceforward, and forever frugal; and the people of the Unites States, banded together, will recognize and maintain our own freedom, and will do no act or acts to enslave ourselves, regardless of marketing schemes and any efforts creditors and stores may make to entice us to empty our wallets and bank accounts.

That the people will, on this second day of July, by proclamation, designate the debts, if any, in which we the people shall use the Debt Snowball Method to speedily eliminate said debts; and heeding the call by Dave Ramsey, and other financial experts, shall on this day cut, melt, or in other words destroy by any means the credit cards by which we have amassed the greatest consumer debt on record; in the absence of credit cards, we will institute budgets based on our available cash, after fair taxes, charitable donations, and savings contributions, that will allow us to control overspending and live without fear of eminent bankruptcy.

Now, therefore we, the People of the United States, by virtue of the power vested in us as citizens of a free nation and granted by Nature’s God, do, on this second day of July, in the year of our Lord two thousand and ten, and in accordance with our money saving purposes do publicly proclaim, from this day forward, to commit to solemnly live by, resulting in peace of mind and financial independence, the following, to wit:

Refined Budgets, Sound Cash Management, Adequate Life Insurance, Sufficient Auto and Home Insurance, Debt Avoidance, Frugality, Bargain Hunting, Retirement Account Funding, College Savings, Stock Speculation Avoidance, Affordable Home Owning, Index Mutual Funds, Estate Planning, and Tax Planning.

Signed this 30th day of June, 2010,

Adam Williams and the Rabbit Funds team

Sign the Financial Emancipation Proclamation by leaving a comment in the comments section below and follow Rabbit Funds on Facebook for more great financial planning info.

To celebrate the birth of our nation and the freedoms that we are afforded, I am writing three posts this week with a twist. Each post is based on an influential document which has given us rights.

On Monday, I outlined the Financial Declaration of Independence. Today’s post, based on the United States’ Bill of Rights, is the Financial Bill of Rights.

1. First Amendment – Freedom from debt, credit cards, and HELOCs
   We shall take out no unnecessary debt living beyond our means, which prohibits free exercise of other rights; or overspend through the use of credit cards; or enslave ourselves through the use of HELOCs; rather save the necessary sum to pay cash for wants and needs.
2. Second Amendment – Right to keep and have savings
   A well regulated Automatic Savings Plan, being necessary to the security of a financially free Family, the right to an Emergency Fund, shall not be infringed.
3. Third Amendment – Protection from bank failure through FDIC insurance
   No Investor shall, in time of peace place cash savings in any bank, without FDIC insurance, nor in time of war, but use multiple banks as necessary.
4. Fourth Amendment – Refusal of Interest Only and Adjustable Rate Mortgages
   The right of the people to be secure in their houses, condos, and town houses, against needless foreclosures and bankruptcies, shall not be violated, and no Interest Only or ARMs shall be issued, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.
5. Fifth Amendment – Health, life, AD&D and LTD insurance
   No person shall be without Health insurance, or adequate Life insurance, sufficient for final expenses and income replacement, except in cases when no financial means to purchase insurance exists, while actively seeking new employment or other income source; nor shall any income producing person be without Accidental Death and Dismemberment insurance; nor shall any income producing person be without Long Term Disability, sufficient to replace 60% of the normal wage.
6. Sixth Amendment – Right to steady, growing mutual fund returns
   In all mutual fund investments, the investor shall enjoy the expectation of steady, growing returns, by careful fund selection based on principles of positive alpha, fair management fees, consistent performance, and passive management where appropriate; each fund consistent with a target asset allocation plan; to have compulsory purchases avoided and decisions based on sound investing principles.
7. Seventh Amendment – Consistent asset allocation by rebalancing
   In accordance with a predetermined asset allocation plan, where the values are determined through evaluation of your risk and investing objectives, the right of rebalancing, or realigning investments which have deviated from their allocation, shall be exercised, and no given investment, shall be allowed to overwhelm the returns of other investments, which may result in large, unexpected losses.
8. Eighth Amendment – Abolishment of excessive management fees
   Excessive management fees shall be avoided, nor 12b-1 fees paid, nor front end or back end loads paid.
9. Ninth Amendment – Protection of rights not specifically enumerated in credit card agreements
   Where credit cards are used, the enumeration in the Agreement, of certain rights, shall not be construed to deny or disparage others retained by the credit card account holder.
10. Tenth Amendment – Powers of spouses and family councils
    The powers delegated to the Head of Household by the Family, are reserved to the Spouses respectively, and decisions discussed in family council.

Signed this 30th day of June, 2010,

Adam Williams and the Rabbit Funds team

Sign the Financial Bill of Rights by leaving a comment in the comments section below and follow Rabbit Funds on Facebook for more great financial planning info.

Everyone wants a safe place to save their money, but if safety was your only priority, you may be tempted to just start a stash under your bed.

Instead, we all want our savings to be safe from a bank collapse and financial disasters, and we want it to be safe from inflation and from being accidentally spent when we come across something we really want. However, while there are great offers on interest rates, fees and bonuses for high interest savings accounts, a savings account is not your only option if you are looking for a safe savings product.

To choose a safe savings product:

• Make sure your safe savings option meets your spending and savings needs as you may need access to your funds and don’t want to be penalized. Plus, if you want the option to grow your savings, then you want to be able to make deposits to your funds.
• Go for no-fee products when possible as even seemingly small fees can eat into your savings over time.
• Look for ease of use as you want to remove all possible obstacles in the way of your savings goals.
• Make sure your safe savings also make a reasonable return. Look for ways to grow your investment since long term savings can be eaten away by the costs such as inflation.

Safe Savings Options

You may have used savings accounts all your life to squirrel away extra funds, but a high interest savings account is no longer your only option to keep your savings safe, not to mention help them keep growing with a safe and guaranteed return. Other safe saving options open to you include:

Certificate of deposit (CD):

• CDs give you a guaranteed return and interest rate. The interest you will earn on your savings in a CD is guaranteed and locked in for the life of the term from the moment you open the account. You can then plan on your returns and even use them to supplement your income while knowing your initial investment will never decrease.
• The more you save the more you can earn. Putting as much of your savings into a safe certificate of deposit as possible ensures the best return as the highest interest rates are offered on the highest balances.
• Restrict your access to help you save for long term goals. As with the highest balance attracting the highest interest rate, so too will a longer term allow you a higher CD rate. Plus, because your savings are locked away in a certificate of deposit account, you are not tempted to spend them, and they keep growing towards your goals and your future. If you do need to access your funds before the end of the term, then you will often be charged cancellation fees and suffer a reduced interest rate.

Money market deposit accounts:

• Offer high yields. A money market deposit account can usually offer you a higher rate of interest on your savings than most CD or ordinary savings accounts.
• Offer few withdrawals. This can often be a condition of the account to help you avoid fees, but it depends on the financial institution which holds the account as some will allow more transactions than others. Restricting your access also helps enforce your savings plan, encouraging you to keep your balance up. However, a money market deposit account is still more like a savings account than a CD as you can withdraw your funds without penalty in most cases.
• Require a high minimum balance. If you do not meet the institution’s minimum balance requirement you will attract more fees on your money market deposit account.

Money market funds:

• You’re investing where the banks invest. The money market is where government, banks and large businesses lend and borrow money for their short term cash needs. This makes a money market fund a safe place for your savings to be invested as you can do so through a well established and secure bank or financial institution.
• You can earn a higher rate on your savings than in a traditional savings account. By investing in a money market fund with an investment company or bank, you can secure high returns on your savings with little risk as those borrowing from the money market usually have a high credit rating.
• You can access your funds within days. There are generally no penalties for accessing the savings you have in a money market fund and the transfer can take a few days to be processed.

Choosing a Safe Savings Investment

High interest savings accounts – and certificate of deposits, money market deposits and money market funds – are all relatively low to no risk investments to help your savings grow until you need them. To help you choose which is the best safe savings option for you, make sure you consider:

• Your savings and cash flow needs. If you think you may need access to some or all of your savings in the near future, choose a short term investment which will allow you access it when you need it, or choose an investment or savings account which does not penalise you for accessing your funds.
• Shop around for the best deal on your savings and on your CDs. There are a range of CD accounts, money market deposits and fund investments available depending on the balance of your savings and the term for which you want to invest. Therefore, make sure you look at all the options available to you on your balance and for your needs because banks and investment institutions offer specials and bonuses to attract your business. So why not take advantage of those offers to help boost your savings safely?

About the Author: Alban is a personal finance writer. He offers advice on personal finance issues and helps people to compare credit cards online.

Welcome to the 104th edition of the Money Hacks Carnival! I couldn’t make up my mind on the theme so I went directly to the source of all light and knowledge – my wife. I ran a couple of my ideas by her and she offered a fun twist on one of them.

For this edition, the links to all of the selected articles (which are all great reads) either ask or answer one simple question: Have you ever? To kick things off, I’d like to quote one of my favorite movie lines, “HAVE YOU EVER danced with the devil in the pale moon light?” (1989 Batman starring Michael Keaton and Jack Nicholson)

Editor’s Choice

HAVE YOU EVER thought of Evaluating The Costs of a Longer Commute: When It’s Better to Just Suck It Up? Check out LenPenzo.Com for an excellent analysis.

HAVE YOU EVER wondered if you’d be better off investing in the currency of a country or in it’s stock market? Intelligent Speculator presents Single Country Investing – Equity or Currency? Surprising conclusion posted at Intelligent Speculator.

HAVE YOU EVER used a race car analogy to structure an investment strategy? Well,Gather Little by Little has Investing Baby Steps #2: Different Investing Strategies for Beginners Part 2.

HAVE YOU EVER realized that someone you trust, or should trust, isn’t actually bound to act in your best interest? Make sure you understand What Is a Fiduciary and Why Does It Matter? posted at Provident Planning.

“HAVE YOU EVER called your boyfriend or girlfriend by the wrong name?” – ESL Conversation Questions

Career

HAVE YOU EVER found yourself asking Who’s to Blame for College Financial Aid Shortfalls? Jason at Automatic Finances offers his two cents.

HAVE YOU EVER been in a situation where you want to help someone find a new job but aren’t sure How to Refer a Friend for a Job? Ben has a few ideas at Money Smart Life.

Debt & Credit

HAVE YOU EVER evaluated which Credit Crunch Spending Ideas to Keep? Find a few ideas at One Advice.

HAVE YOU EVER bought a prepaid credit or debit card? Maybe you should ask yourself Is Money Deposited on a Prepaid Credit Card Safe? Find the answer at Prepaidcards123.

“HAVE YOU EVER looked fear in the face and said I just don’t care?” – Pink, the singer

Frugality & Saving Money

HAVE YOU EVER justified the purchase of 10 garden gnomes, 6 plastic flamingos, and 5 decorative rocks just to show-up your neighbor? Well, Kyle C. offers a spin with Keeping up with the Joneses, In a Good Way posted at Suburban Dollar.

HAVE YOU EVER spent countless hours at a therapist recovering from post traumatic stress disorder resulting from childhood cross-country vacations? Tom says Save Money With Fractional RV Ownership posted at Canadian Finance Blog.

HAVE YOU EVER wrapped yourself in seran wrap (just seran wrap) and waited on the couch for your husband to come home from work? Maybe that will make The Top 10 Ways to Woo on Budget (or perhaps ever?) next year posted at Budgets are Sexy.

“Just tell me HAVE YOU EVER really, really, really every loved a woman?” – Bryan Adams

Investing

HAVE YOU EVER asked How to Open a Scottrade Brokerage Account Online? You can find the answer posted at The Dough Roller.

HAVE YOU EVER been angry with a teller or Personal Banker II? Or wondered why the II? Studenomics presentsCommon Bank Tricks To Watch Out For posted at studenomics.com.

HAVE YOU EVER known the RRSP Deadline – Limits & Options? Visit Ray at Financial Highway for more information on your Canadian retirement accounts.

HAVE YOU EVER found that you feel too much like the hare that thought he could beat the tortoise? Money Ningpresents some surprising findings in Steady and Consistency Can Win the Race.

HAVE YOU EVER left a delivery room and asked yourself, “What’s the Difference between Coverdell Education Savings Accounts vs. 529 College Savings Plans?” Jeff Rose outlines in succinct detail the difference between the two accounts.

HAVE YOU EVER had to explain the difference between an ETF and an Index Fund? I have, about 526 times. How about just sending your friends and family to Why ETFs are So Much Better Than Mutual Funds and Stocks posted at ETF Base.

“Joey, HAVE YOU EVER been in a… in a Turkish prison?” – Captain Oveur, Airplane!

Taxes

HAVE YOU EVER considered using a Tax Advisor? If you aren’t sure if you should use an accountant, then you need to read Six Reasons to Consider Consulting a Tax Advisor posted at My Wealth Builder.

HAVE YOU EVER wondered if Animaniacs actually had deep political undertones and was an attempt to indoctrinate our children? Are you thinking the same thing I’m thinking? For real politics, read Winners and Losers Under Obama’s New Tax Plan posted at Darwin’s Finance.

HAVE YOU EVER been audited by the IRS? Help yourself avoid it by reading How To Organize Your Tax Paperworkposted at Quest For Four Pillars.

Other

HAVE YOU EVER sold out someone you loved just to make a few extra bucks? Maybe you can have both love and money. Read Love & Money: Does It Have to Be One or the Other? posted at Balance Junkie.

HAVE YOU EVER been frugal with your efforts to communicate with your spouse? Maybe you have and didn’t realize it. Read Can Money Un-Do Your Marriage? posted at Cash Flow Sherpas.

HAVE YOU EVER needed some outside help with money concerns in your relationship? I bet you can find at least 20 good ideas to help from the 101 Ways To Improve Your Marriage Money Relationship posted at Money Help For Christians.

Question: “HAVE YOU EVER read a book or watched a movie that made you cry?”
Answer: “The 6th Sense”
– Yahoo Answers

Thank you to everyone who participated in this week’s edition of the Money Hacks Carnival. Please take a moment to inform others of this resource by using any of the social sharing buttons below. I also invite you to subscribe to our RSS Feed for weekly updates on other relevant financial topics. Have a great day!

Are you aware that your investment strategy can end up with a social disorder? Do you currently need to put your investments on Ritalin? Here’s your fiscal check-up. Open wide…

Is your investment strategy ADHD?

Let’s begin the discussion with a great definition of what it means to be ADHD (from Wikipedia): “Attention-deficit hyperactivity disorder (ADHD) is a neurobehavioral developmental disorder. ADHD is primarily characterized by ‘the co-existence of attentional problems and hyperactivity, with each behavior occurring infrequently alone.’ While symptoms may appear to be innocent and merely annoying nuisances to observers, ‘if left untreated, the persistent and pervasive effects of ADHD symptoms can insidiously and severely interfere with one’s ability to get the most out of education, fulfill one’s potential in the workplace, establish and maintain interpersonal relationships, and maintain a generally positive sense of self.’ (emphasis added)”

So how can your investment strategy end up with a social disorder? Let’s evaluate each underlined section above.

1. Each behavior occurring infrequently alone – This is for those of you who don’t really have an investment strategy. You buy whatever “hot investment” your buddy tells you about while golfing. Or you sporadically contribute to your retirement accounts. In order to retire with enough money in savings, you need (1) a defined investment plan with frequent, planned contributions and then (2) you need to stick to your plan only making occasional improvements or thought out modifications.
2. Symptoms may appear to be innocent – So you like to play with part of your investments. I know individuals that find an adrenaline rush in short term investments. Have you ever calculated the amount of money you are losing to transaction fees and taxes? Have you seen the studies that show that frequent investment changes lead to lower returns? Or maybe you don’t play the market but you don’t think too much of skipping contributions to purchase something that you really don’t need. Or maybe you just don’t see a convincing reason to have a strategy. Don’t fall into these traps. Responsible adults make plans.
3. The persistent and pervasive effects of ADHD symptoms can insidiously and severely interfere with one’s ability – I’m not sure if I can say that any plainer. Though, let me give you an example. Let’s say that you decide to contribute $500 a month to your retirement accounts. However, you skip your contribution every December (have to buy all those presents). At the end of 30 years (invested at 12%), you will have $1,609,695 in the bank. If you had not skipped those contributions, then you would have $1,747,482 in the bank. A difference of $137,786 even though you only contributed $15,000 less! See my point? Having an ADHD investment strategy will insidiously and severely interfere with your ability to reach your goals!

Stop right now and think about your investing style? Do you need to put your investments on Ritalin?

Let’s read a bedtime story from Aesop.

There once was a speedy hare who bragged about how fast he could run. Tired of hearing him boast, Slow and Steady, the tortoise, challenged him to a race. All the animals in the forest gathered to watch. Hare ran down the road for a while and then paused to rest. He looked back at Slow and Steady and cried out, “How do you expect to win this race when you are walking along at your slow, slow pace?” Hare stretched himself out alongside the road and fell asleep, thinking, “There is plenty of time to relax.”

Slow and Steady walked and walked. He never, ever stopped until he came to the finish line. The animals who were watching cheered so loudly for Tortoise, they woke up Hare. Hare stretched and yawned and began to run again, but it was too late. Tortoise was over the line. The moral of the story is that “Slow and Steady won the race!”

So what does this have to do with your investment strategy? Well, Aesop is prescribing financial Ritalin. Again from Wikipedia, Ritalin “works by increasing the activity of the central nervous system. It produces such effects as increasing or maintaining alertness, combating fatigue, and improving attention. (emphasis added)” Outlined below is what I think Aesop would have us do with our investments.

1. Central nervous system – The tortoise was able to win the race because he maintained one objective in sight and had an unfailing winner’s attitude. We also need to go straight to the core. Write down what you expect your life to be like when you retire. Describe your relationships, financial status, living conditions, location, etc. That list is your one objective and you must have an unfailing winner’s attitude. The old adage, “Keep your eye on the ball,” will have more impact on your financial resolve than most any other approach.
2. Increasing or maintaining alertness – The hare decided that he wearied from his efforts and could therefore take a nap. You can’t take a financial nap! Keeping to your budget every month moves you one step closer to financial freedom. Making monthly contributions to your investment accounts moves you one step closer to retirement. In the words of Winston Churchill, “Never, never, never give up!”
3. Combating fatigue – Don’t try to run. Everything has its time and place. Establish a plan that outlines when you intend to retire, how much you need to retire, how much you need to invest monthly, and which investment vehicles and types will help you reach your goals. Then slowly but surely follow your plan. Just keep walking, don’t try to run and do everything at once. You just can’t do everything right now and don’t beat yourself up for it.
4. Improving attention – In many accounts of Aesop’s tale, the hare focuses on the fame and attention of the crowd. Conversely, the tortoise ignored the crowd and stuck to his plan. Don’t be sidetracked by the latest trends, need for huge returns, infomercials, pop star financial gurus, or anything else for that matter. Once you have a plan, stick to it.

Conclusion

Does your investment strategy need to be on Ritalin? Well, ask yourself, “Do I have a set contribution amount and schedule? Do I have a defined plan? Do I invest in hot investments? Do I day trade? Am I focused on the short term? Am I tackling too many financial goals at once that are confusing me?” Depending on how you answer those questions, you may need to start taking financial Ritalin by (1) focusing on your reasons for smart investing, (2) adhering to your plan, (3) taking one month at a time, and (4) ignoring the crowd.

P.S. I recognize the irony of me criticizing the hare and my blog is called RabbitFunds. Maybe I should have named it TortoiseFunds.

So my father and I have this ongoing debate. I keep trying to get him to invest in more mutual funds but he enjoys the thrill of buying and selling individual stocks too much. Watching the stocks tick up and down is an adrenaline rush for him.

Am I up?!

Am I [email protected]$%

So I thought writing out my reasoning might benefit both him and you as well.

Reasons to avoid individual stock purchases

Here’s a short, non-comprehensive list of reasons why you should not make individual stock purchases.

1. You are probably not an analyst – Analysts and brokers make money by studying companies and market trends day in and day out. Your day job probably does not allow you to invest the necessary time to  properly research a given company.
2. It’s easy to fall prey to “hot stocks” – If a buddy or Jim Cramer tells you about a rising stock, then most of the growth has probably already occurred. Meaning, individual investors often jump in at or near the peak.
3. Transaction fees and taxes – I’ve invested in individual stocks. So I’ve been in and out of stocks and I’ve seen transaction fees (even the low $7 price from Scottrade) and taxes eat away at profits. What my Dad has ignored is the fact that if he doesn’t hold the stock for at least one year, then the profits are taxed at his tax rate instead of the preferred capital gains tax rate. That’s been a pretty big spread for some people. Unfortunately, the lower capital gains tax rate is set to revert to a higher rate next year if Congress doesn’t change the law. So write your representative.

Reasons to buy Mutual Funds or ETFs

For most investor, mutual funds or ETFs are a good financial fit. Here are a few reasons why.

1. Sleep easy portfolio – I had a Financial Planning professor who taught this principle. A sleep easy portfolio is a portfolio that doesn’t keep you up at night. You have a solid, well-diversified portfolio that can take hits now and then.
2. Low transaction fees – If you want to invest through an automatic investment plan, then buy mutual funds direct from the fund family. If you are investing in no-load funds, then you have no transaction fees. If you are making a one time investment, then an ETF may be better since the management fees are lower than with mutual funds. So even though you incur a transaction fee, the lifetime costs are lower.
3. Diversification – I know that you’ve been told that you need to diversify at least 100 times. And if the market over the last two years hasn’t taught you yet that you really need to diversify, then divest and head to Vegas; your odds are about the same.

If you must invest in stocks

I have two pieces of advice for all of you who just can’t help yourselves. First, wait until your total investment portfolio reaches at least $500,000. Second, never invest more than 5% of your investment portfolio in individual stocks and never more than 2.5% in a given stock. If you follow these two guidelines, then you avoid over-exposing yourself to company specific risk.

On a side note, having a portfolio with a mix of asset classes helps reduce your market risk. So not only should you invest in funds and ETFs, but you should diversify through a variety of asset classes. I personally like this asset allocation calculator.

I was happy to receive a short email from my father recently. He simply stated, “How do I get into the S&P Index Fund? Should I?” Good things do come to those who wait.

Any other important guidelines that I may have missed? For more commentary and information, sign-up for our RSS Feed using your favorite reader.

My wife and I learned this lesson the hard way. Some time ago, we had the opportunity to make an investment in a start-up company that was hoping to go public. After considerable deliberation and time, we decided to go ahead and invest an amount that we were comfortable losing (at least that’s what we thought at the time). The promise of a big payoff was just too good to pass up. Within months, the company went bankrupt and we lost everything that we had invested.

I wasn’t sure what to take away from this experience until I was listening to a Goldman Sachs investment banker during a lecture series on financial planning. He asked the audience midway through his lecture, “What is the number one thing that you should consider when making an investment?” A few dozen hands went up and one student responded, “The return.” To our surprise, our lecturer said, “No.” Everyone’s hand went down. After coaxing us for a few more minutes, someone finally ventured, “Liquidity.” Again to our surprise, our lecturer said, “Bingo, that’s it.” He went on to tell us of an investment that he and his wife had made in the movie The Other Side of Heaven and how they had lost everything. The real kicker was that as they realized that the investment was beginning to slip away, there was nothing they could do to recuperate any portion of their money.

At that moment, I realized that the lesson I needed to learn from our attempt at a small fortune was that we should not make investments where we had no means to recuperate our money even if it was at a loss. We have since added an additional rule to our investment guide – every investment must offer liquidity. The average family does not need to take on that much risk. Although the opportunity for gain may be large, the financial risk associated with non-liquid investments outweighs the potential return. Don’t let greed get the best of you or your money. Had the investment that we made had some option to sell our shares, then we could have minimized our loss. However since we could not sell or transfer our shares, we lost everything.

There are many factors to consider when making an investment and maybe liquidity isn’t the leading one. However, make sure that you have an out, even if that out means at a loss, before investing your hard earned money. If you have no out, then there is probably somewhere better to put your money.